Time to think dollarization!

In the circumstances of the unavoidable inflation and impending currency crisis ushered by Government’s unfettered printing of money, it would seem prudent for the administration to take immediate steps to release the foreign exchange that is presently damned up in the economy – first by allowing individuals to freely hold foreign exchange accounts, and then moving swiftly to start the process of “officially dollarizing” our currency system.

Our Barbados dollar will be 45 years old in May this year having come into circulation when the Central Bank was founded by Act of Parliament in 1972. There was a time when a country’s currency was thought to be a symbol of its people’s independence, becoming almost as sacred as the flag. But the crumpled pieces of paper and metal discs that we carry in our purses, have no real value unless we agree that they truly represent a value that will be easily exchangeable for something we will come to need. In a world of global trade, convertibility is much more important than nationalist sentimentality.

By 1973, the Barbados dollar had fully replaced the East Caribbean dollar with which we had parity, and on the 5th of July 1975, Government took the step of “pegging” our new born dollar to the US dollar at an exchange rate of US$1 = Bds$2. In order to give birth to a currency and then go and “peg” its value to another currency so confidently, a country’s monetary authority has to assure all intended users that the notes and coins are worth what they say they are worth – the strength of the guarantee rests on the currency’s backing with “something both hard and stable”.

Until 1944, the anchoring commodity of most world currencies was gold (silver for the British Pound). At the Bretton Woods Conference that year, however, it was proposed that since the United States dollar was the most used currency for world trade, it should be recognized as the strongest backing currency. So it came to be formally accepted that governments’ currency authorities would hold a stock of US dollars as a reserve and they would count on “the full faith and credit” of the US government to back their national currencies at an approved market value using US dollars instead of gold bullion.

At the time Barbados was introducing her own currency to the world, Barbados’ reserves and our economic outlook was in such good shape that we easily zeroed in on a convenient price of US$ 0.50 to underpin a Barbados dollar, and the relationship has worked quite well for the economy so far. But in order to keep its currency’s exchange rate valid, the local monetary authority must in principle keep a supply of US dollars in reserve at a level such that there is a close correspondence in value with the amount of money in circulation in the country.

The Central Bank of Barbados must therefore have a Ulysses S. Grant (US$ 50.00) held in its vaults for every extant Grantley Adams in case we should want to exchange it. If the amount of currency in circulation in Barbados exceeds the equivalent US dollar reserve, the 2-to-1 parity is broken, and our currency would no longer be redeemable for its original value.

Every working day, the commercial banks in Barbados will apply to the Central Bank for a quantity of US dollars that are ordered by Barbadians and local merchants who want to buy a commodity from another country so as to enjoy lifestyle choices. The Central Bank is expected to provide us with this money at the pegged rate. To balance against these outflow payments, merchants and individuals that earn foreign exchange in the country are required by law to deposit this foreign currency income into the banking system so that the Central Bank can dispose of a sufficient supply in reserve to satisfy the demand.

Guess what happens when the reserves of foreign exchange become exhausted? Denied the value of your money, you are probably going to be willing to pay a premium for the US dollars, and you’ll go to the black market. Let us suppose, for example, a vendor on the street asks you for Bds$2.25 for the US dollar and you need the foreign exchange badly enough to spring for it, so subtly – without the Minister of Finance or
the Central Bank announcing it or even admitting it, we will have witnessed an effective 12% devaluation of the Barbados dollar.

It is incomprehensible that our monetary authorities are not seeing that Bajans are already hoarding dollars. Every taxi driver in the island as a typical example, is restricting his family’s food budget so that he can secretly build his private reserve of US dollars. And now, with interest rates this low, the average Barbadian coming into contact with a Ulysses Grant would naturally prefer to save it in this form over the less versatile Grantley Adams!

Governments of miniscule open economies like Barbados are learning that they are much too vulnerable to shifts in world trade to try “punching above their weight” by supporting the luxury of a central bank or a currency board. Prominent economists have begun to argue that essentially all developing countries should dollarize, and even some industrial countries have decided to go that way.

3 Responses to Time to think dollarization!

John Walcott March 14, 2017 at 4:21 pm

Dolarization cannot work because we are a small, open economy that does not earn large sums of foreign exchange like Singapore or Bermuda. It would create a strangle hold on the economy and reduce the production and the GDP

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